Question

1. Youssef owns 1 share of stock A and 1 share of stock B. In 1 year from today, the total value of his holdings is expected to be 173.48 dollars. Stock A is currently priced at 99.64 dollars, has an expected return of 12.93 percent, and is expected to pay a dividend of 4.17 dollars in 1 year from today. Stock B has an expected return of 12.97 percent and is expected to pay a dividend of 6.29 dollars in 1 year from today. What is the price of stock B today?

Answer 1

For stock A

Expected return = (Price after a year - Current price + Dividend) / Current price

0.1293 = (Price after a year - 99.64 + 4.17) / 99.64

Thus, price after a year for stock A = 108.35

As combined value of stock A + stock B in year 1 = 173.48,

So, the value of stock B in year 1 = 173.48-108.35 = $65.13

For stock B

Expected return = (Price after a year - Current price + Dividend) / Current price

0.1297 = (65.13 - Current price +6.29)/Current price

1.1297*Current price = 71.42

Current price = $63.22

Thus, the price of stock B today is $63.22.